Sketchers Inc., is considering the purchase of a $500,000 computer with an

economic life of five years. The computer will be fully depreciated over five years using

the straight-line method. The market value of the computer will be $100,000 after five

years. The computer will replace five office employees whose combined annual salaries

are $150,000. However, the electricity charges for running the computer will be incurred

at $15 per unit consumption basis. The 1st year consumption is expected to be 2000 units.

After that company aims to keep a check will be able to reduce consumption by 200 unit

on reducing balance basis until the machine was sold. The machine will also immediately

lower the firms required net working capital by $100,000. This amount of net working

capital will need to be replaced once the machine is sold. The corporate tax rate is 34

percent.

a) Is it worthwhile to buy the computer if the appropriate discount rate is 12 percent?

b) Explain project acceptance rules for Payback and IRR techniques. Also give points why

payback period is not a preferred method.